O'Reilly Exceeds, EPS Up 20%

O’Reilly Automotive Inc. (ORLY) earned $1.15 per share in the second quarter of 2012, a robust 20% increase from 96 cents in the prior-year quarter and ahead of the Zacks Consensus Estimate by a penny. Net income increased 9% to $146 million (9.3% of sales) from $134 million (9.0%) in the second quarter of 2011.

Sales for the quarter rose 6% to $1.56 billion from $1.48 billion a year ago, almost in line with the Zacks Consensus Estimate of $1.57 billion. Comparable store sales (change in sales for stores open at least one year) scaled up 2.5% compared with 4.4% in the second quarter of 2011.

Gross profit for the quarter increased 9% to $780 million (49.9%) from $719 million (48.6%) a year ago. Selling, general and administrative expenses escalated 8% to $536 million (34.3%) from $496 million (33.5%) in the second quarter of prior year. Operating income improved 10% to $244 million (15.6%) from $222 million (15.0%) a year ago.

During the quarter, O’Reilly opened 50 stores, relocated 17 and renovated 34 in order to improve its image in the retail market and ensure the best customer experience. As of June 30, 2012, the company has operated 3,859 stores. It is on track to open a total of 180 stores in 2012.

Share Repurchase

During the quarter, O’Reilly repurchased 4.5 million shares of its common stock at an average price of $97.47, which implies a total investment of $440 million. During the first half of the year, the company has repurchased 6.3 million shares at an average price of $94.52, reflecting a total investment of $594 million. Subsequent to the end of the second quarter until July 25, 2012, the company has repurchased an additional 3.1 million shares at an average price of $85.48, implying a total investment of $267 million.

Since the inception of the share repurchase program in January 2011 until July 25, 2012, the company has repurchased 25.3 million shares at an average price of $72.67, reflecting a total investment of $1.84 billion.

As announced on June 1, 2012, the company’s Board of Directors has increased the authorization under the repurchase program by an additional $500 million, raising the cumulative authorization to $2 billion. As of July 25, 2012, the company had approximately $163 million remaining under its share repurchase program.

Financial Position

O’Reilly had cash and cash equivalents of $367.7 million as of June 30, 2012, up from $268.8 million as of June 30, 2011. Inventories of $2.2 billion formed a significant 78% of current assets as of June 30, 2012.

Long-term debt was $797.4 million as of June 30, 2012 compared with $498.6 million as of June 30, 2011. This translated into a higher long-term debt-to-capitalization ratio of 23% compared with 14% as of June 30, 2011.

In the first half of the year, net cash flow from operations improved to $691.5 million from $561.5 million in the prior-year period. This was primarily attributed to improved profits and favorable changes in operating assets and liabilities.

Capital expenditures (net) were almost flat at $149.3 million compared with $150.0 million in the first half of 2011. As a result, free cash flow improved to $540.1 million during the period from $410.8 million a year ago.

Guidance

For the third quarter of the year, O’Reilly has projected earnings per share of $1.25 to $1.29 and consolidated comparable store sales to increase in the range of 1% to 3%.

For full year 2012, the company anticipates earnings per share in the range of $4.56 to $4.66 and consolidated comparable store sales to increase by 3% to 5%. This compared with the previous guidance of $4.47–$4.57 and 3% to 6%.

The company reiterated its revenue guidance of $6.15 billion–$6.25 billion, gross margin guidance of 49.4%–49.8% and operating margin guidance of 15.4%–15.9% for the year.

It has also reiterated its capital expenditures guidance of $315 million to $345 million but raised free cash flow guidance to $725 million to $775 million from $700 million to $750 million for the year.

Our Take

O'Reilly Automotive is the third largest specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the U.S., selling products to both Do-it-Yourself (:DIY) customers and Do-it-for-Me (:DIFM) or professional installers.

The company sells an extensive line of products consisting of new and remanufactured automotive hard parts (such as mufflers, brakes, and shock absorbers), maintenance items, accessories, a complete range of auto body paint and related materials, automotive tools, and professional service equipment. Its main competitors include Advance Auto Parts Inc. (AAP), AutoZone Inc. (AZO) and Pep Boys - Manny, Moe & Jack (PBY).

The company currently retains a Zacks #3 Rank on its shares, which translates to a short-term rating of Hold, and we have a long-term recommendation of Neutral on its shares.